The End of Normal

From respected thinker and economic iconoclast James K. Galbraith, a smart, scathing explanation for the economic crisis, and a vision for the future

From one of the most respected economic thinkers and writers of our time, a brilliant argument about the history and future of economic growth.

The years since the Great Crisis of 2008 have seen slow growth, high unemployment, falling home values, chronic deficits, a deepening disaster in Europe and a stale argument between two false solutions, "austerity" on one side and "stimulus" on the other. Both sides and practically all analyses of the crisis so far take for granted that the economic growth from the early 1950s until 2000 interrupted only by the troubled 1970s-represented a normal performance. From this perspective, the crisis was an interruption, caused by bad policy or bad people, and full recovery is to be expected if the cause is corrected.

The End of Normalchallenges this view. Placing the crisis in perspective, Galbraith argues that the 1970s already ended the age of easy growth. The 1980s and 1990s saw only uneven growth, with rising inequality within and between countries. And the 2000s saw the end even of that, despite frantic efforts to keep growth going with tax cuts, war spending and financial deregulation. When the crisis finally came, stimulus and automatic stabilization were able to place a floor under economic collapse. But they are not able to bring about a return to high growth and full employment. In The End of Normal, "Galbraith puts his pessimism into an engaging, plausible frame. His contentions deserve the attention of all economists and serious financial minds across the political spectrum" (Publishers Weekly).

"Galbraith's study marks another sharp and suggestive installment in the ongoing effort to determine how and why our economic and political leaders have lost their once-confident grasp of sound strategies to promote macroeconomic growth. And to restore a measure of that lost confidence Galbraith lays out a bold intellectual agenda."

Auteur

James Galbraith

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The End of Normal

One

Growth Now and Forever

To begin to understand why the Great Financial Crisis broke over an astonished world, one needs to venture into the mentality of the guardians of expectation—the leadership of the academic economics profession—in the years before the crisis. Most of today’s leading economists received their formation from the late 1960s through the 1980s. But theirs is a mentality that goes back further: to the dawn of the postwar era and the Cold War in the United States, largely as seen from the cockpits of Cambridge, Massachusetts, and Chicago, Illinois. It was then, and from there, that the modern and still-dominant doctrines of American economics emerged.

To put it most briefly, these doctrines introduced the concept of economic growth and succeeded, over several decades, to condition most Americans to the belief that growth was not only desirable but also normal, perpetual, and expected. Growth became the solution to most (if not quite all) of the ordinary economic problems, especially poverty and unemployment. We lived in a culture of growth; to question it was, well, countercultural. The role of government was to facilitate and promote growth, and perhaps to moderate the cycles that might, from time to time, be superimposed over the underlying trend. A failure of growth became unimaginable. Occasional downturns would occur—they would now be called recessions—but recessions would be followed by recovery and an eventual return to the long-term trend. That trend was defined as the potential output, the long-term trend at high employment, which thus became the standard.

To see what was new about this, it’s useful to distinguish this period both from the nineteenth-century Victorian mentality described by Karl Marx in Capital or John Maynard Keynes in The Economic Consequences of the Peace, and from the common experience in the first half of the twentieth century.

To the Victorians, the ultimate goal of society was not economic growth as we understand it. It was, rather, investment or capital accumulation. Marx put it in a phrase: “Accumulate, accumulate! That is Moses and the Prophets!” Keynes wrote: “Europe was so organized socially and economically as to secure the maximum accumulation of capital . . . Here, in fact, lay the main justification of the capitalist system. If the rich had spent their new wealth on their own enjoyments, the world would have long ago found such a régime intolerable. But like bees they saved and accumulated” (Keynes 1920, 11).

But accumulate for what? In principle, accumulation was for profits and for power, even for survival. It was what capitalists felt obliged to do by their economic and social positions. The purpose of accumulation was not to serve the larger interest of the national community. It was not to secure a general improvement in living standards. The economists of the nineteenth century did not hold out great hopes for the progress of living standards. The Malthusian trap (population outrunning resources) and the iron law of wages were dominant themes. These held that in the nature of things, wages could not exceed subsistence for very long. And even as resources became increasingly abundant, the Marxian dynamic—the extraction of surplus value by the owners of capital—reinforced the message that workers should expect no sustained gains. Competition between capitalists, including the introduction of machinery, would keep the demand for labor and the value of wages down. Marx again:

“Like every other increase in the productiveness of labour, machinery is intended to cheapen commodities, and, by shortening that portion of the working-day, in which the labourer works for himself, to lengthen the other portion that he gives, without an equivalent, to the capitalist. In short, it is a means for producing surplus-value.” (Marx 1974, vol. 1, ch. 15, 351)

Yet living standards did improve. That they did so—however slowly, as Keynes later noted—was a mystery for economists at the time. The improvement might be attributed to the growth of empires and the opening of new territories to agriculture and mining, hence the importance of colonies in that era. But in the nineteenth century, economics taught that such gains could only be transitory. Fairly soon population growth and the pressure of capitalist competition on wages would drive wages down again. Even a prosperous society would ultimately have low wages, and its working people would be poor. This grim fatalism, at odds though it was with the facts in Europe and America, was the reason that economics was known as the “dismal science.”

Then came the two great wars of the twentieth century, along with the Russian Revolution and the Great Depression. Human and technical capabilities surged, and (thanks to the arrival of the age of oil) resource constraints fell away. But while these transformations were under way, and apart from the brief boom of the 1920s, material conditions of civilian life in most of the industrial countries declined, or were stagnant, or were constrained by the exigencies of wartime. The Great Depression, starting in the mid-1920s in the United Kingdom and after 1929 in the United States, appeared to signal the collapse of the Victorian accumulation regime—and with it, the end of the uneasy truce and symbiotic relationship between labor and capital that had graced the prewar years. Now the system itself was in peril.

For many, the question then became: could the state do the necessary accumulation instead? This was the challenge of communism, which in a parallel universe not far away showed its military powe…